When planning to leave an inheritance, most people want to leave their wealth to loved ones – not HMRC. In 2019/20 tax year for an individual anything over £325,000 in your estate is potentially taxed at 40% which can mean the government becomes a major beneficiary of your estate. If you own a home, or share of a home, and are leaving it to a direct descendant, for example to your child, you may also be entitled to an additional allowance of £150,000 in 2019/20 tax year, called the Residence Nil Rate Band. This effectively increases the threshold for Inheritance Tax and any unused allowance can also be transferred onto your spouse or civil partner.
At Four Wealth Management, our financial advisers are experienced in reviewing your estate planning and making recommendations to reduce or possibly eliminate inheritance tax.
A common way to reduce Inheritance Tax is through gifting.
What is a gift?
A gift can be anything that has a value such as money, property or possessions. It is also a gift if an asset is transferred to someone else for less than it is worth, for example selling your house to your child for less than full market value – the difference in value is classed as a gift.
Below are some tips of how you can use gifting to reduce your liability.
How much can you afford to give away?
When making a gift from your estate it can be difficult to know how much to give away and how much money you need to keep for yourself to live comfortably for the rest of your life. Our financial advisers are experienced in calculating the long-term impact gifting could have on your portfolio. This will help you to determine how much you can give away without affecting your lifestyle.
In each tax year, you can give away up to £3,000 in gifts without incurring Inheritance Tax, this is known as an annual exemption. This can be split between as many people as you like and can be assets or cash. If you do not use your exemption, you can carry it forward for one year. For example, a couple can gift up to £12,000 in two years using this exemption.
Gifts from income
If you have enough income to maintain your usual lifestyle, you can also make regular gifts out of surplus income which are exempt from Inheritance Tax. These gifts must be from post-tax income. For example, saving regularly into your child’s savings account.
We consider it crucial to consult with an adviser before starting gifts from income as the rules for this exemption are complex and if they are not followed correctly, Inheritance Tax may be due on these when you die.
Parents and grandparents can make one-off marriage gifts, free from Inheritance Tax. This can be to children (up to £5,000 per parent) or grandchildren (up to £2,500 per grandparent). If you are not a parent or grandparent, you can gift up to £1,000. These gifts must be made either on or before the wedding takes place.
In each tax year, you can gift up to £250 to any number of people, free of Inheritance Tax, in any one tax year.
Donations to charities or political parties
Gifts to charities, museums, universities, some sports clubs and some political parties made during your lifetime or through your Will are exempt from Inheritance Tax.
The seven-year rule
Where the above exemptions are not available, it is possible to make gifts outright to an individual without any tax payable on the gift, provided the gifts are made at least seven years before death.
Start Inheritance Tax planning today
By planning with the help of an adviser, you can use these allowances to steadily reduce the size of your estate, and therefore reduce the amount of Inheritance Tax liability. The sooner you start Inheritance Tax planning, the more time you have to reduce your liability. Our advisers will work with you to review your estate planning regularly as your circumstances and the tax rules change.
The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.